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Market Sense and Nonsense: How the Markets Really Work (and How They Don't) Hardcover – November 6, 2012

3.8 out of 5 stars 32 customer reviews

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Editorial Reviews

Amazon.com Review

From the Author: "(Almost) Everything You Know About Investment Is Wrong"

Jack D. Schwager
Jack D. Schwager

When it comes to the markets, academics, professionals and novice investors have one thing in common: They all operate on assumptions that fail to hold up in the harsh light of reality. The following are a sampling of observations about how markets really work:

  1. The market is not always right. The best opportunities arise when the market is most wrong.
  2. Big price moves begin on fundamentals but end on emotion.
  3. Past returns are not future returns. Past returns can be very misleading if there are reasons to believe that future market conditions are likely to be significantly different from those that shaped past returns.
  4. The best-performing past investments often do worse than the worst-performing past investments in the future--and the future after all is where we all have to make our investment decisions.
  5. The best time to initiate long-term investments in equities is after extended periods of underperformance.
  6. Faulty risk measurement is worse than no risk measurement at all because it will lull investors into unwarranted complacency.
  7. Volatility is frequently a poor proxy for risk. Many low volatility investments have high risk, while some high volatility investments have well-controlled risk.
  8. The real risks are often invisible in the track record.
  9. High past returns sometimes reflect excessive risk-taking in a favorable market environment rather than manager skill.
  10. Return alone is a meaningless statistic because return can always be increased by increasing risk. Return/risk should be the primary performance metric.
  11. Leverage alone tells you nothing about risk. Risk is a function of both the underlying portfolio and leverage. Leveraged portfolios can often be lower risk than unleveraged portfolios--it depends on the assets in the portfolio.


Everybody, and I mean everybody who has an investment portfolio will profit from reading this book kudos to the author for offering the investing world an uncommonly worthwhile book. (forexpros.com, 12th Novemebr 2012) Mr Schwager s book starts off with plenty of sound, basic advice before expertly demonstrating that a leveraged exchange traded fund is a dreadful investment because of its structure, being almost bound to disappoint (The Economist, January 2013) Full of common sense (Pensions World, February 2013)

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Product Details

  • Hardcover: 368 pages
  • Publisher: Wiley; 1 edition (November 6, 2012)
  • Language: English
  • ISBN-10: 1118494563
  • ISBN-13: 978-1118494561
  • Product Dimensions: 6.4 x 1.1 x 9.3 inches
  • Shipping Weight: 1.2 pounds (View shipping rates and policies)
  • Average Customer Review: 3.8 out of 5 stars  See all reviews (32 customer reviews)
  • Amazon Best Sellers Rank: #718,640 in Books (See Top 100 in Books)

More About the Author

Jack Schwager is a recognized industry expert in futures and hedge funds and the author of a number of widely acclaimed financial books. He is currently the co-portfolio manager for the ADM Investor Services Diversified Strategies Fund, a portfolio of futures and FX managed accounts. Previously, Mr. Schwager was a partner in the Fortune Group, a London-based hedge fund advisory firm, which specialized in creating customized hedge fund portfolios for institutional clients. His prior experience includes 22 years as Director of Futures research for some of Wall Street's leading firms and 10 years as the co-principal of a CTA.

Mr. Schwager has written extensively on the futures industry and great traders in all financial markets. He is perhaps best known for his best-selling series of interviews with the greatest hedge fund managers of the last two decades: Market Wizards (1989), The New Market Wizards (1992), and Stock Market Wizards (2001). The latest book in the series, Hedge Fund Market Wizards is due to be released in May 2012. Mr Schwager's first book, A Complete Guide to the Futures Markets (1984) is considered to be one of the classic reference works in the field. He later revised and expanded this original work into the three-volume series, Schwager on Futures, consisting of Fundamental Analysis (1995), Technical Analysis (1996), and Managed Trading (1996). He is also the author of Getting Started in Technical Analysis (1999), part of John Wiley's popular Getting Started series.

Mr. Schwager is a frequent seminar speaker and has lectured on a range of analytical topics including the characteristics of great traders, investment fallacies, hedge fund portfolios, managed accounts, technical analysis, and trading system evaluation. He holds a BA in Economics from Brooklyn College (1970) and an MA in Economics from Brown University (1971).

Customer Reviews

Top Customer Reviews

Format: Hardcover Verified Purchase
In "Market Sense and Nonsense" author Jack Schwager takes one piece of Wall Street wisdom to task after another. In all he analyzes and overturns 55 common misconceptions about the way markets work. The book is divided into three parts plus an epilogue and two appendices. All tie together pointing the way to better-informed investment strategies.

- Part One lays the groundwork by overturning many common fallacies about the value of expert opinions, past performance metrics, mutual funds and leveraged ETFs. It includes a tour-de-force destruction of the efficient-market hypothesis (the "deficient" hypothesis in Schwager's words) that is by itself worth the price of the book.

- Part Two explores hedge funds in detail starting with their historical development, explains the many different strategies employed, compares hedge funds to mutual funds and managed futures, and evaluates fund-of-fund investment strategies. I found this section surprisingly interesting and practical both as an active trader myself and as a prospective hedge fund investor.

- Part Three looks at portfolios and defines eight principles of portfolio construction with a tilt towards hedge fund investing. Schwager points out that the risk-return profile of hedge funds is superior to mutual funds and, in the form of fund-of-funds, an investment in a hedge fund is actually available to and preferable even for investors of modest means.

- The Epilogue contains 32 useful "investment observations" drawn from the book. Appendix One is an introduction to options as an investment tool. Appendix Two contains mathematical formulas for all of the risk-return metrics used in the book. Some of these are unique tools published here for the first time.
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Format: Hardcover Verified Purchase
For the record I own all of Jack Schwager's books. He has done a great job over the years and I have often used them as a reference in my work. Unfortunately the great "track record" ends with a crash and a lot of nonsense...a book that is full of bad research and adhoc conclusions. A truly dangerous book for lay people that are not well versed in this field. The BIG idea is that one should put their money in a fund of funds.
The "evidence" is a jumble of misrepresentations and half truths. There are too many problems to even mention here. Seventeen years ago Jack wrote a really good book, Managed Trading, Myths and Truths. It is still very relevant in this field. So what happened? I am not sure but somehow Mr Schwager has decided that he knows it all and instead of presenting a balanced view as he did previously he "preaches the truth". This is very dangerous. As the sequence of "truths" continued to be unveiled throughout the book the wheels finally came off on page 290. In presenting his theory of "Robin Hood Investing" Mr Schwager concludes " A more conclusive test would have required repeating the experiment for far more than 10 randomly selected portfolios - a requirement that exceeded both my patience in repeating Excel spreadsheet calculation steps and my programming ability, which is nil" Maybe Mr Schwager should stick to interviewing people who actually know what they are doing. I felt that I should write this and warn anybody out there who is new in this field and just trying to learn. This is not your book.
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Format: Hardcover Verified Purchase
Jack Schwager does excellent work and this book is no exception. My gripe lies with the fact that the book is mistitled - it is mainly about investing in a portfolio of hedge funds. The opening chapters are more general, and his skewering of efficient market theory is delightful. There is some information of general application to portfolio investing. My advice to potential purchasers is to check the table of contents first to make sure this book is for you.
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Format: Hardcover
I was excited when I first heard about this book. This is for two reasons. A new book from Jack Schwager is always something to look forward to. He has done the Investment Management industry tremendous service through his educational and entertaining in-depth interviews with knowledgeable, passionate money managers. These interviews make it obvious to me, that the market is not efficient if you have a well thought-out investment philosophy, a coherent process, strong work ethics and discipline. Second, the book's title made me genuinely curious. The market is flooded with industry-specific aphorisms or "market truths", some more commonsensical than others, although together far too often contradictory and quite commonly derived from the "good old days". How do they stand up to a reality test in today's highly competitive market? Few are more appropriate for this kind of analysis than Schwager.

The essence of the book is 55 "Investment Misconceptions" where Schwager tells us what reality is. Some stated misconceptions are quite obvious to the experienced investor, e.g. "The average investor can benefit from listening to the recommendations made by financial experts" and others are truly intriguing, e.g. "The diversification benefits beyond 10 holdings are minimal" (hint, if you consider worst-case out comes instead of averages, a portfolio of say 20 holdings usually provides substantial additional risk-reduction benefits). Schwager's "reality-testing" is usually not empirical in an academic sense: rather, it is based on his long experience in analyzing investment managers and their portfolios. But the discussions on the misconceptions are usually straightforward and logical. I doubt an experienced investor would disagree with the conclusions.
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